UPDATED: As it arrived in court Monday to ask a judge to approve its reorganization plan, Relativity Media revealed that it has raised just $20 million of the $100 million that it had said it needed to emerge from Chapter 11 bankruptcy. But the company told U.S. Bankruptcy Court Judge Michael Wiles that it would raise the rest of the needed funds once it emerges from bankruptcy and that it was still prepared to relaunch its film studio, under the leadership of Kevin Spacy and his producing partner, Dana Brunetti.
During the prolonged hearing, which was expected to continue into Tuesday in New York, Wiles called the absence of a complete financing plan “odd,” but said he intended to hear testimony later in the day from Relativity’s experts about the entertainment company’s capital structure.
The topic arose early in the hearing when Wiles praised the amount of work Relativity had put into settling with various lenders and other creditors in the bankruptcy, but added a query about future financing. “I am a little less clear as to just where we are on the financing for the business going forward,” Wiles said, “and what equity commitments do you have, and have you filed a P and A and ultimates facility, and do you have agreements under that facility?”
Attorney Richard Wynne, representing Relativity, assured the judge the company did have equity commitments, later specified as being $20 million. But Wynne conceded that “where we are is not where we had hoped or anticipated to be in terms of getting all the equity pre-confirmation.” He added: “The plan is going to require that we raise some of the equity post-confirmation and we will be putting on evidence with respect to that. And we will be meeting those obligations in the future.”
An attorney representing Relativity Media CEO Ryan Kavanaugh said the lower than projected equity investment at the front end had been made possible by cost-cutting at the company. “They have streamlined the capital structure of the company and reduced overhead from $90 million to about $30 million,” said attorney Van Durrer. While there were complaints about the 11th hour alterations, Durrer argued: “It’s fair to say things have improved.”
The developments came on a morning that Kevin Spacey appeared in court, via video, and told Wiles that he should approve Relativity’s reorganization. The actor, who has signed on to serve as chairman of Relativity Studios, termed himself “enormously excited” at the prospect of getting started with the company. But Spacey’s future employer has not resolved all of the objections to its reorganization.
The streaming service Netflix remained the last major party objecting to the confirmation of Relativity’s reorganization plan. Attorney Scott McNutt, representing Netflix, said he was disturbed by the lack of detail about the financing and management behind the new Relativity. He asked for at least two more days to digest recent financial disclosures filed by Relativity. But Judge Wiles told the Netflix attorney that he should have sought out the money details through earlier discovery; requests the judge noted Netflix had not made.
The continued opposition by the streaming service provoked the sharpest exchange of the morning session. Durrer argued that Relativity had signed its contract with Netflix at a time when few other entertainment companies would do business with the upstart. He suggested that Netflix was now trying to take advantage of its emergence as a distribution power.
“Now that Netflix is the behemoth that it is and Relativity is working very hard to regain its status in the entertainment community , Netflix is looking for a pound of flesh that, candidly, it is not entitled to,” Durrer said. He said Relativity has been working hard to emerge from bankruptcy so it can again produce the minimum number of films promised to Netflix. Durrer called that “the best good faith there could possibly be.”
McNutt denied that Netflix was simply looking for a sweeter deal from distressed Relativity. He said the streaming service had set aside tens of millions of dollars for films that never arrived, then had to reallocate funds and change its plans. He called the changes “a huge problem,” for Netflix.
Judge Wiles noted before breaking for lunch that Netflix appeared to be the “one remaining objector” to Relativity’s proposed reorganization. He suggested more discussions during the break might resolve the dispute.
After the break, the court also intended to hear testimony from Matthew R. Niemann, an executive with Houlihan Lokey, the financial firm that has been advising Relativity on the reorganization. Niemann is expected to address the details of the company’s proposed financial structure, which Judge Wiles noted was “more of a moving target than usual” in bankruptcy cases. Relativity attorneys also said they expected to offer testimony from Joseph Nicholas, the Chicago investor who is supposed to be Kavanaugh’s major financial partner going forward.
Nicholas said in a declaration filed with the court over the weekend that he has invested $80 million over the last year. He also stated that Relativity had obtained $150 million in combined debt and equity, enough, Nicholas said, for the company to emerge from Chapter 11. He said Relativity expected to bring in $50 million in additional equity this summer and another $50 million in the summer of 2017. Nicholas did not give any specifics about who would supply any of the fresh cash, but he was expected to be asked that Monday afternoon.
Wiles also asked for more information about a promised $150 million operating loan, and a loan for prints and advertising on future films. Lawyers for Relativity said they would provide more details on those loans as the hearing continued.